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Rating Action:

Moody's revises Bluestem Brands' outlook to negative; Caa1 CFR affirmed

26 Jun 2018

New York, June 26, 2018 -- Moody's Investors Service ("Moody's") today revised Bluestem Brands, Inc.'s ("Bluestem" or the "Company") ratings outlook to negative from stable. At the same time, Moody's affirmed Bluestem's Corporate Family Rating at Caa1, Probability of Default Rating at Caa1-PD, and its Senior Secured Term Loan at Caa1.

"The outlook change to negative reflects Bluestem's increasing refinancing risk in light of its need to materially improve operating performance within the next 12 months," stated Moody's retail analyst, Mike Zuccaro. "Bluestem has launched a series of actions designed to boost revenue and profit growth, including stabilizing its credit portfolio, cost reductions, and improved marketing, merchandising and inventory productivity that will take more time to take hold. Meanwhile, debt maturities are quickly approaching, with its secured revolver due to expire on July 10, 2020 and its secured term loan set to mature on November 7, 2020."

Moody's took the following rating actions:

..Issuer: Bluestem Brands, Inc.

Ratings affirmed:

.... Corporate Family Rating at Caa1

.... Probability of Default Rating at Caa1-PD

.... Senior Secured Term Loan due 2020 at Caa1 to (LGD4) from (LGD3)

Outlook Actions:

....Outlook, changed to Negative from Stable

RATINGS RATIONALE

Bluestem's Caa1 Corporate Family Rating reflects the inherent volatility of revenue and earnings due to the discretionary nature of its products and high credit risk of its subprime target demographic. The Company offers financing to low and middle income consumers who are more sensitive to economic downturns and more prone to credit delinquency or default, particularly in challenging economic environments. Bluestem's financial leverage is currently high, stemming from the 2014 acquisition of the company by Bluestem Group Inc. (formerly, Capmark Financial Group Inc.), the 2015 acquisition of Orchard Brands Corporation, and recent weak performance. As of May 4, 2018, lease-adjusted debt/EBITDAR was around 6.8 times, including a $13.3 million negative impact on EBITDA from a first quarter accounting change (or around 5.8x excluding this impact). However, Moody's believes that Bluestem's overall risk profile is significantly higher due to its reliance on customer financing for the bulk of Northstar Portfolio sales, the subprime nature of its customers which can increase volatility of the shared earnings within the receivables portfolio, and the limited number of program counterparties. Moody's accounts for this risk by capitalizing the average sold receivables balance using the value of equity at a 5:1 debt/equity ratio, which effectively increases Bluestem's current leverage to over 9.5 times (or around 8.5x when excluding the first quarter accounting change impact).

Balancing these risks are the Company's credible position in its niche category, differentiated business model due to integration of proprietary credit offerings with a broad general merchandise offering that provides a significant barrier to entry, and favorable demographics due to the large and underserved target customer demographic. The Company has a sizeable customer database with significant number of customers making repeat purchases using Bluestem's proprietary revolving credit lines. The Company also benefits from continued solid growth trends in online retail spending. Moody's expects liquidity to remain adequate over the next 12 months, with balance sheet cash, cash flow and excess revolver availability more than sufficient to cover cash flow needs over this timeframe, with excess cash used to reduce borrowing at the end of the fiscal year. While covenant cushion in both its Credit and Program Agreements will remain tight over the very near term, Moody's expects that the Company has levers in place (including cash at the parent) that will allow them to remain in compliance over the next twelve months.

Ratings could be downgraded if the Company is unable to refinance its capital structure well ahead of its obligations becoming current in 2019 (starting with its revolver in July 2019, and term loan in November 2019), if earnings fail to turnaround, free cash flow turns negative, or if financial covenant violations appear likely.

Ratings could be upgraded if the Company maintains adequate liquidity by extending its debt maturity profile and returns to profitable growth with material credit metric improvement. Specific metrics include Moody's debt/EBITDA (including leases and the off-balance sheet receivables financing adjustment) sustained below 7.0 times and EBITDA-Capex/interest expense above 1.25 times.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Eden Prairie, MN, Bluestem Brands, Inc. operates multiple direct to consumer retail brands. Its Northstar portfolio includes Fingerhut and Gettington, which sell a broad selection of name brand and private label merchandise serving low- to middle-income consumers by offering multiple payment plans through revolving credit lines or installment loans. Its Orchard portfolio includes Appleseed's and Bedford Fair among several others, which sell apparel, accessories, and home products for the boomer and senior demographic, and provide customers with the ability to obtain credit through a third-party private label credit card.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael M. Zuccaro
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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